SS I - Ponzi's Scheme

Who was Charles Ponzi?

An Italian immigrant turned Boston financier

When did Ponzi begin his scheme?

Early 1920

What promise did Ponzi make to investors?

50% return within 45 days, 100% return within 90 days

How did Ponzi claim he could generate these returns?

Through the resale of International Reply Coupons (IRC)

What are International Reply Coupons (IRC)?

Vouchers allowing people in different countries to purchase return postage by redeeming pre-paid money orders in another nation’s stamps

What financial concept did Ponzi exploit to claim profits?

Favorable foreign exchange rates and arbitrage

What is arbitrage?

Buying assets in one market to sell for a profit in another

Why did Ponzi keep his methods secret?

He claimed to protect closely guarded trade secrets

What global event created a speculative atmosphere for Ponzi’s scheme?

World War I, which caused European currency fluctuations

Did Ponzi’s early investors make money?

Yes, they reaped spectacular gains initially

What type of financial scheme was Ponzi actually running?

A classic pyramid scheme

How did Ponzi sustain the scheme temporarily?

Used newly invested funds to pay dividends to earlier investors

Approximately how many people invested in Ponzi’s scheme?

Between 30,000 to 40,000

What was the range of investments in Ponzi’s scheme?

$25 to more than $25,000

What was the estimated total value of Ponzi’s scheme at its height?

15 to 20 million dollars

Who began suspecting Ponzi’s fraud?

Postal inspectors

Why did postal inspectors doubt Ponzi’s scheme?

They knew there were not enough IRCs in circulation to account for his returns

Which newspaper ran an exposé on Ponzi in July 1920?

The Boston Post

What action did Ponzi take in response to scrutiny?

Voluntarily suspended all new investments while a government auditor reviewed his books

What effect did suspending new investments have?

It prevented Ponzi from paying existing investors and ensured the fraud would be exposed

What happened as authorities closed in on Ponzi?

Thousands of investors rushed to withdraw money, many lost their entire savings

How many people lost life savings indirectly due to Ponzi’s collapse?

As many as 50,000

When did the federal Grand Jury indict Ponzi?

October 1920

How many counts of mail fraud were included in the indictments?

Eighty-six

What was Ponzi convicted of?

Mail fraud, forgery, and larceny

How long did Ponzi serve in federal prison?

Three and a half years

What additional prison sentence did Ponzi serve after federal prison?

Nine years in state prison for violating Massachusetts law

Why is Ponzi historically significant?

His infamy led to the term “Ponzi scheme” and captured the something-for-nothing mentality of the 1920s